My take: very interesting stuff: what he's getting at is that while credit theoretically may be expanded (and was with CDOs and other derivatives), if the underlying collateral is suspect, no one will extend the credit. They will insist on good collateral, which the author insists has to be Federal Reserve notes collateralized by T-bills, federal agency securities or gold. Since the T-bills and notes are in short supply, their prices will go up--even to the point of creating a negative interest rate on the T-bill, i.e., you pay to hold them, rather than receiving interest (this happened in Japan for a spell--people paid the gummint to hold their money). And so, in August '07, the T-bill yield began falling as there was a rush to less risky "money," as he says, down the pyramid of risk. He's arguing that the Fed has already lost the battle against deflation.
therefore, he says: "Regardless of statistical figures showing that the global money supply is increasing at an unprecedented rate, the hand-to-hand money supply may well be shrinking as hoarding demand for FR notes becomes voracious. The economy will be starved of hand-to-hand money. Depression follows deflation as night follows day."
Unsaid, but as sure as night follows day, if he's right, we will see gold treated as money at a time when the supply of money is deflating--and the gold price could well go beyond imagination. |
